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THE IGNORANCE HYPOTHES

Is The final popular theory for why some nations are poor and some
are rich is the ignorance hypothesis, which asserts that world inequality
exists because we or our rulers do not know how to make poor
countries rich. This idea is the one held by most economists, who take
their cue from the famous definition proposed by the English economist
Lionel Robbins in 1935 that “economics is a science which studies
human behavior as a relationship between ends and scarce means
which have alternative uses.” It is then a small step to conclude that
the science of economics should focus on the best use of scarce
means to satisfy social ends.

The ignorance hypothesis maintains that poor countries are poor


because they have a lot of market failures and because economists
and policymakers do not know how to get rid of them and have heeded
the wrong advice in the past. Rich countries are rich because they
have figured out better policies and have successfully eliminated these
failures.

On the face of it, the sustained economic decline that soon set in in
Ghana after independence from Britain was caused by ignorance. The
British economist Tony Killick, then working as an adviser for the
government of Kwame Nkrumah, recorded many of the problems in
great detail. Nkrumah’s policies focused on developing state industry,
which turned out to be very inefficient. Killick recalled: The footwear
factory … that would have linked the meat factory in the North through
transportation of the hides to the South (for a distance of over 500
miles) to a tannery (now abandoned); the leather was to have been
backhauled to the footwear factory in Kumasi, in the center of the
country and about 200 miles north of the tannery. Since the major
footwear market is in the Accra metropolitan area, the shoes would
then have to be transported an additional 200 miles back to the South.
Killick somewhat understatedly remarks that this was an enterprise
“whose viability was undermined by poor siting.” The footwear factory
was one of many such projects, joined by the mango canning plant
situated in a part of Ghana which did not grow mangos and whose
output was to be more than the entire world demand for the product.
This endless stream of economically irrational developments was not
caused by the fact that Nkrumah or his advisers were badly informed
or ignorant of the right economic policies.

They had people like Killick and had even been advised by Nobel
laureate Sir Arthur Lewis, who knew the policies were not good. What
drove the form the economic policies took was the fact that Nkrumah
needed to use them to buy political support and sustain his
undemocratic regime. Neither Ghana’s disappointing performance after
independence nor the countless other cases of apparent economic
mismanagement can simply be blamed on ignorance.

After all, if ignorance were the problem, well- meaning leaders would
quickly learn what types of policies increased their citizens’ incomes
and welfare, and would gravitate toward those policies. Consider the
divergent paths of the United States and Mexico. Blaming this disparity
on the ignorance of the leaders of the two nations is, at best, highly
implausible. It wasn’t differences in knowledge or intentions between
John Smith and Cortés that laid the seeds of divergence during the
colonial period, and it wasn’t differences in knowledge between later
U.S. presidents, such as Teddy Roosevelt or Woodrow Wilson, and
Porfirio Díaz that made Mexico choose economic institutions that
enriched elites at the expense of the rest of society at the end of the
nineteenth and beginning of the twentieth centuries while Roosevelt
and Wilson did the opposite. Rather, it was the differences in the
institutional constraints the countries’ presidents and elites were facing.
Similarly, leaders of African nations that have languished over the last
half century under insecure property rights and economic institutions,
impoverishing much of their populations, did not allow this to happen
because they thought it was good economics; they did so because
they could get away with it and enrich themselves at the expense of
the rest, or because they thought it was good politics, a way of keeping
themselves in power by buying the support of crucial groups or elites.
The experience of Ghana’s prime minister in 1971, Kofi Busia,
illustrates how misleading the ignorance hypothesis can be. Busia
faced a dangerous economic crisis. After coming to power in 1969, he,
like Nkrumah before him, pursued unsustainable expansionary
economic policies and maintained various price controls through
marketing boards and an overvalued exchange rate. Though Busia had
been an opponent of Nkrumah, and led a democratic government, he
faced many of the same political constraints. As with Nkrumah, his
economic policies were adopted not because he was “ignorant” and
believed that these policies were good economics or an ideal way to
develop the country. The policies were chosen because they were
good politics, enabling Busia to transfer resources to politically
powerful groups, for example in urban areas, who needed to be kept
contented. Price controls squeezed agriculture, delivering cheap food
to the urban constituencies and generating revenues to finance
government spending. But these controls were unsustainable. Ghana
was soon suffering from a series of balance-of-payment crises and
foreign exchange shortages. Faced with these dilemmas, on
December 27, 1971, Busia signed an agreement with the International
Monetary Fund that included a massive devaluation of the currency.

The ignorance hypothesis differs from the geography and culture


hypotheses in that it comes readily with a suggestion about how to
“solve” the problem of poverty: if ignorance got us here, enlightened
and informed rulers and policymakers can get us out and we should be
able to “engineer” prosperity around the world by providing the right
advice and by convincing politicians of what is good economics. Yet
Busia’s experience underscores the fact that the main obstacle to the
adoption of policies that would reduce market failures and encourage
economic growth is not the ignorance of politicians but the incentives
and constraints they face from the political and economic institutions in
their societies. Although the ignorance hypothesis still rules supreme
among most economists and in Western policymaking circles—which,
almost to the exclusion of anything else, focus on how to engineer
prosperity—it is just another hypothesis that doesn’t work.
It explains neither the origins of prosperity around the world nor the lay
of the land around us—for example, why some nations, such as
Mexico and Peru, but not the United States or England, adopted
institutions and policies that would impoverish the majority of their
citizens, or why almost all sub-Saharan Africa and most of Central
America are so much poorer than Western Europe or East Asia. When
nations break out of institutional patterns condemning them to poverty
and manage to embark on a path to economic growth, this is not
because their ignorant leaders suddenly have become better informed
or less selfinterested or because they’ve received advice from better
economists. China, for example, is one of the countries that made the
switch from economic policies that caused poverty and the starvation
of millions to those encouraging economic growth.

But, as we will discuss in greater detail later, this did not happen
because the Chinese Communist Party finally understood that the
collective ownership of agricultural land and industry created terrible
economic incentives. Instead, Deng Xiaoping and his allies, who were
no less self-interested than their rivals but who had different interests
and political objectives, defeated their powerful opponents in the
Communist Party and masterminded a political revolution of sorts,
radically changing the leadership and direction of the party. Their
economic reforms, which created market incentives in agriculture and
then subsequently in industry, followed from this political revolution. It
was politics that determined the switch from communism and toward
market incentives in China, not better advice or a better understanding
of how the economy worked. WE WILL ARGUE that to understand
world inequality we have to understand why some societies are
organized in very inefficient and socially undesirable ways. Nations
sometimes do manage to adopt efficient institutions and achieve
prosperity, but alas, these are the rare cases. Most economists and
policymakers have focused on “getting it right,” while what is really
needed is an explanation for why poor nations “get it wrong.” Getting it
wrong is mostly not about ignorance or culture. As we will show, poor
countries are poor because those who have power make choices that
create poverty. They get it wrong not by mistake or ignorance but on
purpose. To understand this, you have to go beyond economics and
expert advice on the best thing to do and, instead, study how decisions
actually get made, who gets to make them, and why those people
decide to do what they do. This is the study of politics and political
processes. Traditionally economics has ignored politics, but
understanding politics is crucial for explaining world inequality. As the
economist Abba Lerner noted in the 1970s, “Economics has gained the
title Queen of the Social Sciences by choosing solved political
problems as its domain.” We will argue that achieving prosperity
depends on solving some basic political problems. It is precisely
because economics has assumed that political problems are solved
that it has not been able to come up with a convincing explanation for
world inequality. Explaining world inequality still needs economics to
understand how different types of policies and social arrangements
affect economic incentives and behavior. But it also needs politics.